Israel Price Rises Seen Driving Hawkish Turn: Decision Day Guide

(Bloomberg) --

The Bank of Israel is expected to issue more hawkish guidance and hold its key interest rate after a rapid rise in inflation built on strong economic growth. 

The central bank is also likely to raise its forecasts for both growth and inflation, and to announce the end of its bond-purchasing program following the U.S. Federal Reserve’s decision to begin tapering its own, Israeli analysts said.  

Bank of Israel to Announce End of Forex-Buying Program: Mizrahi

All 17 economists surveyed by Bloomberg expect the base rate to remain at 0.1%.

When the previous rate decision was published in August, Israel was in the midst of a fourth wave of the pandemic, and the bank spoke then of conducting “a very accommodative monetary policy.” Since then, the health picture and economy have improved, meaning the bank is likely to shift its outlook toward future rate increases, Modi Shafrir, chief strategist at Mizrahi-Tefahot Bank, said. 

Israel’s Second Quarter Growth Revised Up to 16.6% Annualized

After a bounce-back from lockdown and soaring foreign investment drove economic growth, Victor Bahar, chief economist for Bank Hapoalim Ltd., expects the central bank to revise its growth forecast as high as 7%. Other economists also see it raising its expectations from the 5.5% predicted in July. 

The inflation projection for the year is also likely to exceed the 1.7% forecast after price growth accelerated in August to an eight-year high, according to economists from Meitav Dash Investments Ltd., Mizrahi-Tefahot Bank and Harel Insurance Investments & Financial Services Ltd. 

Inflation, now beyond the midpoint of the government’s 1% to 3% target range, has climbed because of a pandemic-driven jump in global shipping and commodity prices. Israel imports the majority of its goods by sea.

Central bank chief Amir Yaron is also likely to announce the quantitative easing program will end once it reaches the target of 85 billion shekels ($26.2 billion), according to Alex Zabezhinsky, chief economist at Meitav Dash. 

Bahar expects the same. “The central bank in Israel is very influenced by the decisions of the Fed,” he said. 

Analysts predict the bank may also formally announce the end of its $30 billion foreign-exchange purchasing program, which was launched earlier this year and brought the shekel down from a 24-year high. The currency, which dropped below 3.2 to the dollar just a few weeks ago, has weakened in the last few days as international markets fell, forcing Israeli institutional investors to buy dollars to cover overseas positions. 

Although many of the fundamental reasons for the shekel’s strength remain, the program won’t be extended and the bank instead will purchase foreign currency as needed, Bahar said. 

In August, Yaron said the Bank of Israel wasn’t bound by the scope of the foreign-currency buying program, and would continue to operate in the currency market at its discretion once the $30 billion target is reached.

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